The View | Why Hong Kong home and office costs are likely to weather political crisis and trade war

The world’s most overvalued housing market and the priciest office market are undergoing a rigorous stress test.

The fallout from the rapidly escalating anti-government protests in Hong Kong is putting the city’s residential property bubble – the largest among 20 cities analysed by UBS in its latest Global Real Estate Bubble Index – under significantly more strain, and adding to the pressure on office rents in the Central district, where occupancy costs remain the highest globally by a wide margin.

The unrest, which has entered its 12th week, is taking its toll on the territory’s economy and financial markets, already buffeted by the trade war and the slowdown in China’s economy.

Hong Kong’s economy contracted quarter-on-quarter in the second quarter of this year, while the private sector suffered the sharpest deterioration in business conditions last month since the height of the global financial crisis, survey data from IHS Markit shows. Even Hong Kong’s own embattled government is talking openly about an impending recession.

What is more, the Hang Seng Index, which has proved a reliable predictor of the city’s house prices, is now in the red for 2019, and is the only benchmark equity gauge currently in negative territory among 25 developed markets tracked by Bloomberg. The Hang Seng Properties Index, moreover, is down 17 per cent from its peak in early April, and was in a technical bear market for a few days last week.

Investor sentiment in the real estate market has taken a knock. The largest residential plot at the former Kai Tak airport was sold at a discounted price last month, and attracted the lowest number of bids since the government put the first site out to tender in 2013.